Sensitron and Douglas Tools manufacture and market power tools and accessories.
ID: 2492929 • Letter: S
Question
Sensitron and Douglas Tools manufacture and market power tools and accessories. Sensitron targets customers in the professional contractor market, while Douglas Tools focuses on home users and professionals. Selected financial data for the companies appears below.
Sensitron
2010
2009
2008
Sales
$2,109,100
$2,095,700
$2,175,700
Average Accounts Receivable
564,500
608,650
631,072
Change in Sales from previous year
0.64%
-3.68%
11.83%
Douglas Tools
2010
2009
2008
Sales
$4,394,000
$4,245,600
$4,474,900
Average Accounts Receivable
718,800
745,850
803,150
Change in Sales from previous year
3.50%
-5.12%
0.59%
Required:
1.
Calculate the accounts receivable turnover ratio for each firm for year 2010, 2009, 2008.
2. Suggest reasons for the differences in the accounts receivable turnover ratios for these two firms.
Sensitron
2010
2009
2008
Sales
$2,109,100
$2,095,700
$2,175,700
Average Accounts Receivable
564,500
608,650
631,072
Change in Sales from previous year
0.64%
-3.68%
11.83%
Douglas Tools
2010
2009
2008
Sales
$4,394,000
$4,245,600
$4,474,900
Average Accounts Receivable
718,800
745,850
803,150
Change in Sales from previous year
3.50%
-5.12%
0.59%
Explanation / Answer
1. Accounts Receivable turnover ratio = Net Sales/ Average Accounts Receivable.
Sensitron's Accounts Receivable turnover ratio for the years is:-
For 2010
Accounts Receivable turnover ratio = 2,109,100/564,500 = 3.74 times
For 2009
Accounts Receivable turnover ratio = 2,095,700/608,650 = 3.44 times
For 2008
Accounts Receivable turnover ratio = 2,175,700/631,072 = 3.45 times
Douglas Tools's Accounts Receivable turnover ratio for the years is:-
For 2010
Accounts Receivable turnover ratio = 4,394,000/718,800 = 6.11 times
For 2009
Accounts Receivable turnover ratio = 4,245,600/745,850 = 5.69 times
For 2008
Accounts Receivable turnover ratio = 4,474,900/803,150 = 5.57 times
2. Accounts Receivable Turnover is the variation which indicates the ability of the firm or concern to collect their debts. It may also indicates the change of the credit policy of the firms. While comparing the two firms, the one who had the high ratio indicated that they collect the debts quickly as compare to the other firm. Collecting the debts quickly will raise funds to the firm which can be put to some other use.
In the case of the above firms Douglas Tools have higher ratio as compare to the Sensitron which indicates that the credit policy or collecting of debts of Douglas Tools is more quickly than to Sensitron.
In Sensitron Firm the efficieny trend of collecting debts decreases in the year 2009 with compare to 2008 and increases in the year 2010 with compare to 2009 whereas Douglas Tools efficiency trend of collecting debts is incresing year by year.
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